A recent Law 360 story by Jeff Sistrunk, “AIG Can’t Escape Paying AlixPartners’ $19M Costs on Appeal,” reports that an AIG unit cannot recoup over $19 million paid to help AlixPartners LLP defend and settle a claim that it gave bad advice to a private equity firm that acquired a model railway maker, a Michigan appeals court affirmed, agreeing that AlixPartners’ notice of the claim was timely. 

A panel of the state Court of Appeals upheld Judge Wendy Potts’ March 2017 ruling granting AlixPartners' motion for summary disposition on AIG unit Illinois National Insurance Co.'s complaint, saying the trial judge got it right when she determined that the consulting firm had properly notified the insurer of the underlying arbitration claim lodged by Kingsbridge Capital Management GP Ltd.  As such, Illinois National cannot recover the sums it paid on AlixPartners’ behalf, the panel found.  “Finding no error in the court’s determination as to when the claim was first made, we affirm the trial court’s finding that the Kingsbridge claim was covered under [the policy],” Judge Deborah A. Servitto wrote for the panel.

London-based Kingsbridge had hired AlixPartners to perform due diligence in connection with its acquisition of Marklin, a German model train company.  The consulting firm prepared a report indicating that, by shifting production to Asia and implementing online marketing, Marklin could significantly increase its earnings before interest, tax, depreciation and amortization, or EBITDA, according to court documents.  In May 2006, AlixPartners and Marklin signed a separate management consulting contract, with AlixPartners agreeing to help implement the restructuring concept it crafted, court papers indicated.

By 2007, though, Marklin’s earnings were almost €6 million ($8.3 million) lower than the projections AlixPartners had presented.  Marklin sent a letter in March 2008, and a subsequent letter the following month, requesting that AlixPartners return part of its fees, according to court papers.  Due to the problems at Marklin, Kingsbridge initiated arbitration against AlixPartners in late 2011, alleging the consulting firm committed malpractice during the due diligence process.  An arbitrator found in favor of Kingsbridge, determining that Marklin’s earnings and debt level were significantly lower than AlixPartners had presented in its investment advice.  However, while the award was on appeal, Kingsbridge and AlixPartners reached a multimillion-dollar settlement.

Illinois National had agreed to defend and indemnify AlixPartners, while reserving its rights to later challenge coverage.  After paying $19.1 million in defense and settlement costs on AlixPartners' behalf in the Kingsbridge action, the insurer filed the instant suit in 2014, seeking reimbursement.  AlixPartners contended that it had properly reported the Kingsbridge dispute to Illinois National under a policy spanning from March 15, 2008, through June 15, 2009, with an extended reporting period through the end of August 2009.  The consulting firm gave notice to the insurer in August 2009 after receiving a draft arbitration complaint from Kingsbridge a month prior, according to court documents.

Illinois National, on the other hand, argued that AlixPartners first became aware of the Kingsbridge dispute when it received Marklin's March 2008 letter and, as a result, failed to properly report the claim.  Judge Potts sided with AlixPartners, finding in her March 2017 order that, among other things, the consulting firm's fee dispute with Marklin and the arbitration against Kingsbridge were two different matters.

In the decision, the appellate panel said Judge Potts’ reasoning was sound.  Kingsbridge’s claim revolved around AlixPartners’ advice on the Marklin acquisition, while Marklin’s claim concerned the consulting firm’s alleged mismanagement of the model train maker, the panel noted.  In addition, it said, the Illinois National policy excluded claims pertaining to fee disputes, so AlixPartners had no obligation to report Marklin’s demands to the insurer.

“The Kingsbridge arbitration complaint clearly referred to issues specific to the defendant’s contract with Kingsbridge in the same way that the March and April letters referred to matters unique to the defendant’s Marklin agreement,” Judge Servitto wrote.  The appeals panel also said Judge Potts properly declined to retroactively reform AlixPartners’ policy. Illinois National had argued that AlixPartners wrongfully concealed the fee dispute with Marklin in its application for a policy renewal.

Judge Potts, however, pointed out that none of the questions in the renewal application requested information regarding any circumstances that may have resulted in a claim against AlixPartners.  Under Michigan law, a policyholder is not obligated to volunteer information about any pending or prior claims, the judge said in her order.  The appellate panel agreed with Judge Potts that AlixPartners was not required to disclose Marklin's letter demands to Illinois National, given that those fee-related claims were excluded from coverage under the policy.  “[Illinois National] fails to provide an explanation as to why an uninsured claim need be reported and how a claim that [Illinois National] would not be responsible to cover under the policy would materially change the risk for those claims that it contracted to cover," Judge Servitto wrote.

The case is Illinois National Insurance Co. v. AlixPartners LLP, case number 337564, in the State of Michigan Court of Appeals.

A recent The Recorder story by Ross Todd, “Judge Hammers Plaintiffs Counsel, Rejects Yahoo Breach Settlement,” reports that the federal judge overseeing litigation targeting Yahoo! Inc. with data breach claims has rejected a proposed $85 million settlement citing a number of problems with the deal—including that the plaintiffs are asking for an “unreasonably high” attorneys fees of up to $35 million.  U.S. District Judge Lucy Koh, who has been overseeing In re Yahoo! Inc. Customer Data Security Breach Litigation since 2016, took issue with the fact that 143 lawyers at 32 firms were included in the $22 million lodestar calculation submitted by the plaintiffs, even though she only authorized five firms to work on the case.

Koh wrote in a 24-page order that legal issues involved were “not particularly novel.”  The proposed deal, the judge noted, was filed before the parties finished briefing class certification.  She also noted that the case involved only a limited number of claims under California law, and class counsel took only 7 depositions, declining to depose Yahoo’s proposed experts.  “Specifically, the court finds that class counsel prepared limited legal filings with numerous overlapping issues, and that class counsel completed limited discovery relative to the scope of the alleged claims,” Koh wrote.  “Moreover, class counsel fails to explain why it took 32 law firms to do the work in this case.”

Koh issued a superseding order clarifying that she only authorized “five attorneys, who are not members of Plaintiffs’ Executive Committee, to attend and help prepare their respective clients for depositions.”  Plaintiffs lead counsel, John Yanchunis, of Morgan & Morgan in Tampa, Florida, didn’t immediately respond to an email seeking comment.

Koh has been overseeing the multidistrict litigation brought on behalf of 3 billion Yahoo account holders whose data was compromised in three massive breaches dating back to 2013.  She previously signed off on an $80 million deal in Sept. 2018, which Yahoo reached with investors who claim the company misled them about the breaches.

In the order, she called Yahoo’s track record of nondisclosure and lack of transparency “egregious.”  She further found that the proposed settlement failed to disclose that it released claims dating back to 2012, when Yahoo suffered smaller breaches that still affected millions of accounts.  Koh found further found that releasing those claims would be improper, that the deal didn’t adequately disclose the sorts of business changes Yahoo has made to protect customers going forward, and that estimated 200 million member class size was likely inaccurate.

“Any of these bases would be sufficient to deny the motion for preliminary approval,” Koh wrote.  Koh compared the Yahoo deal unfavorably to two prior high-profile class action settlements that she oversaw—the $415 million settlement on behalf technical workers to settle claims that their wages were suppressed by Silicon Valley companies’ alleged agreements to avoid recruiting each others’ workers, and the $115 million settlement Anthem reached on behalf of 79 million customers affected by the insurer’s data breach.

Koh noted that the lodestar for the Yahoo lawyers was higher than the $18 million figure submitted by the lawyers working on the high-tech worker case, even though the latter had taken 93 depositions, served 28 third-party subpoenas, litigated two rounds of class certification, had handled an appeal in the case, and prepared it for trial.  “Moreover, class counsel in In re High-Tech secured a significantly larger settlement of $415 million with more direct payments to class members than the $50 million settlement fund disclosed in the proposed notice here,’ Koh wrote.

In the Anthem case, Koh noted, that the insurance company disclosed the breach timely and offered all those affected two years of free credit monitoring prior to settlement.  Anthem also committed to tripling its data security budget for three years.  By contrast, Koh found that Yahoo delayed disclosure and its customers’ data ended up on the dark web.

“Yahoo’s history of nondisclosure and lack of transparency related to the data breaches are egregious,” Koh wrote.  “Unfortunately, the settlement agreement, proposed notice, motion for preliminary approval, and public and sealed supplemental filings continue this pattern of lack of transparency.”  Worth noting for the Yahoo lawyers: In both the high-tech case and the Anthem data breach Koh gave the plaintiffs lawyers lower fees than they had requested.  She granted the high-tech lawyers less than half the $81 million they’d requested and cut more than $9 million from the $38 million the Anthem lawyers requested.

A recent Law 360 story by Anne Cullen, “Judge Orders Blue Cross Attys to Shape Up in Antitrust MDL,” reports that the Alabama federal judge overseeing sweeping antitrust litigation against the Blue Cross Blue Shield network has said he can no longer wait for the insurance giant’s army of lawyers to marshal themselves into a more manageable group, ordering a dozen attorneys into a "Council of Twelve" to streamline a leadership plan.  In an unusual decision handed down, U.S. District Judge R. David Proctor took it upon himself to straighten out Blue Cross’ defense team, noting that even though it’s rare for a court to set up lead counsel on the defendants’ side in multidistrict litigation, the court had “reached that point.”

“Since the inception of this litigation, the court has repeatedly requested that the defendants organize themselves in a manner that allows the court to interact with the defendants in a more manageable, representative manner,” Judge Proctor said.  “The defendants have been reluctant to scale down their ranks to operate in the streamlined manner envisioned by the court.”  “Therefore, the court undertakes that task itself, with input from all parties,” he added.

The attorneys Judge Proctor handpicked hailed from just seven of the more than two dozen firms defending Blue Cross in long-running litigation leveled by health providers and subscribers claiming the insurers agreed not to compete with one another in various markets through trademark licensing deals and other arrangements.

Three attorneys from Kirkland & Ellis LLP ended up on what Judge Proctor dubbed the “Council of Twelve,” while Hogan Lovells, Cravath Swaine & Moore LLP and Wallce Jordan Ratliff & Brandt LLC provided two lawyers each.  Attorneys from Maynard Cooper & Gale PC, Lightfoot Frankline & White LLC and Crowell & Moring LLP rounded out the dozen.  And that council is tasked with pulling together a plan to whittle the defense team into a more efficient machine by mid-February.

This isn’t the first time Judge Proctor has lost his patience with the Blue Cross team, as in May he chastised them over what he called a “discovery soap opera,” going as far as to toss in an animated GIF of Tom Hanks mouthing “Really?” into a discovery order.

In the ruling, he told the council that their appointments are not final.  “The court reserves the power to change the composition of the council in its sole discretion,” he said.  The case is In re: Blue Cross Blue Shield Antitrust Litigation, case number 2:13-cv-20000, in the U.S. District Court for the Northern District of Alabama.

A recent New York Law Journal article by Howard B. Epstein and Theodore A. Keyes, “Defense Costs Coverage 101,” reports on defense fees and costs in the insurance coverage practice area.  This article was posted with permission.  The article reads:

Upon receipt of a claim, the risk manager or in-house counsel should coordinate with the company’s insurance broker to make sure notice is submitted to the insurer.  However, even earlier, in anticipation of claims, counsel should review the terms of the relevant insurance policies and develop an understanding of the defense cost coverage provisions.

An insurance company’s obligation to pay defense costs incurred by its insured in response to a claim typically falls into one of two categories: (1) a duty to defend or (2) a duty to advance defense costs. The duty to defend is most often included in general liability (GL) policies while the duty to advance is more likely to be included in directors’ and officers’ liability (D&O) policies.  Policy forms can vary, however, and a GL or D&O policy may contain either type of defense obligation.  In addition, specialty insurance policies covering, for example, employment practices or pollution liability risks may contain either a duty to a defend or duty to advance clause.

Regardless of the type of insurance policy, an insurer may be willing to consider including either defense clause if requested by the broker or the insured.  While each of these clauses provides insurance for defense costs incurred by the insured, there are distinctions worth considering which may dictate which clause is preferable for a given insured.

Duty to Defend

While case law varies to some degree from state to state, the duty to defend is broader than the duty to advance under New York law and the law of the majority of other jurisdictions.  It is also well-settled that the duty to defend is broader than the insurer’s duty to indemnify for loss under a policy. The duty to defend is triggered “whenever the allegations in a complaint against the insured fall within the scope of risks undertaken by the insurer, regardless of how false or groundless those allegations may be.” Seaboard Surety Company v. Gillette Company, 64 N.Y.2d 304, 486 N.Y.S.2d 873 (1984).  Even where some asserted claims fall outside the scope of covered risks, as long as some of the claims are within the scope of coverage, the insurer will have a duty to defend.  Once triggered, the insurer is required to pay defense costs on behalf of the insured.

While the duty to defend is broader than the duty to advance, it also gives the insurer control over the defense of the claim.  Typically, where a policy contains a duty to defend, the insurer will have the right to appoint defense counsel.  Thus, with a duty to defend policy, the insured gets the benefit of broad defense coverage but gives up the right to choose defense counsel and, effectively, control of the defense.

An exception to this rule, in most jurisdictions including New York, is that where there is a conflict of interest between the insured and the insurer, the insured is entitled to select independent defense counsel.  Public Service Mut. Ins. Co. v. Goldfarb, 53 N.Y.2d 392, 442 N.Y.S.2d 422 (1981).  In the case of such a conflict, the insurer is responsible to pay the reasonable defense fees of independent counsel.

Duty to Advance Defense Costs 

In contrast to the duty to defend, the duty to advance merely requires the insurer to reimburse the insured for costs incurred in defense of claims.  Moreover, while the duty to defend requires the insurer to pay defense costs on behalf of an insured whenever the claims alleged fall within the scope of the risk insured, the duty to advance only requires the insurer to advance defense costs for covered claims.

Policies that contain a duty to advance clause generally require the insurer to advance defense costs on an unspecified “timely basis” or within a specified period of time that can range from 30 to 120 days after submission of invoices.  Such policies also typically permit the insurer to allocate defense costs to covered and uncovered claims and thus, in some cases, provide a basis for the insurer to advance only a percentage of the defense costs.  In addition, a duty to advance is conditional—in the event that it is subsequently determined that there is no coverage for the claims, the insurer may have a right to seek recoupment of the defense costs from the insured.

On the other hand, in the context of a duty to advance, the insured is typically entitled to select its own defense counsel and has control of the defense as well as the responsibility to defend the claim.  In addition, a duty to advance will typically be triggered by a written demand seeking monetary relief whereas a duty to defend, in some policies, will only be triggered by an actual suit.

Key Considerations

Whether a duty to defend or duty to advance is a better fit for a particular insured may depend on several factors including the insured’s profile and the types of potential claims.  For example, a cost-conscious insured may prefer a duty to defend because defense costs will be paid directly by the insurer and because the insurer is more likely to pay 100 percent (or close to 100 percent) of the defense costs above the applicable deductible or retention.  In contrast, under a policy with a duty to advance, there is likely to be considerable lag time between the submission of legal invoices and payment by the insurer, and there is also a stronger possibility that the insurer will pay less than 100 percent of the invoices—either based on an allocation between covered and uncovered claims or persons or based on the insurer’s defense counsel guidelines.

Where choice of counsel is important to the insured, a duty to advance will likely be the preferred option.  Choice of counsel may be of primary importance to an insured if the insured has a relationship with counsel in whom they have developed confidence.  Similarly, if the claims at issue require a particular expertise or in-depth understanding of a specific industry, the insured may believe it is better positioned to select counsel than the insurer.  Likewise, where the claims asserted threaten the continued viability of the insured’s business, the insured will likely prefer to retain counsel with whom they have substantial experience or counsel with a reputation for expertise in the relevant area.

While a duty to advance clause typically grants the insured the right to select counsel, in some cases selection of counsel will be subject to insurer approval, such approval not to be unreasonably withheld.  In the case of either a duty to defend or advancement policy, it may also be possible to negotiate pre-approval of defense counsel.

Where control of the defense is the primary concern, a duty to advance policy will likely be a better fit for the insured.  Control may be the primary concern where the insured is involved in a regulated industry and where it may be the subject of investigations or claims by government agencies.  Similarly, where the insured operates in an industry in which litigation is relatively common or routine, the insured may prefer to have control over its defense.  Likewise, where a claim concerns private, confidential or even potentially embarrassing issues, the insured will likely prefer to have control of the defense.

Timely Notice and Tender

In any event, regardless of the type of defense obligation, the risk manager or in-house counsel should be sure to give timely notice of claim in order to avoid jeopardizing the right to coverage.  In addition, it is crucial to give notice as soon as possible because an insurer’s obligation to pay defense costs is not typically triggered until notice has been submitted.  So while a couple of weeks’ delay in providing notice may not jeopardize coverage, the defense costs incurred prior to the notice will not be recoverable from the insurer.  Further, to the extent that an opportunity for early settlement negotiations may arise, it will be necessary to coordinate those discussions with the insurer.  Consequently, notice should always be provided before any significant defense costs are incurred.

Howard B. Epstein is a partner at Schulte Roth & Zabel, and Theodore A. Keyes is special counsel at the firm.

A recent Law 360 story by Rachel Graf, “Attys in $29M Och-Ziff Securities Settlement Seek $8.6M Fees,” reports that attorneys who reached a preliminary $28.75 million settlement resolving investors’ allegations that hedge fund Och-Ziff Capital Management Group LLC downplayed investigations into an African bribery scheme asked a New York federal court for $8.63 million in fees.  The investors’ attorneys said the amount, representing 30 percent of the total settlement, is reasonable since they worked for four years to achieve a “significant” settlement that was worth as much as roughly 28 percent of the estimated class-wide damages.  The attorneys are asking to be reimbursed for $401,240 in expenses as well.  “Considering the extensive investigations, motion practice, and discovery completed at the time of the settlement, the time and labor expended by class counsel here amply supports the requested fee,” the filing said.

In October, Och-Ziff and its former CEO Daniel S. Och and former CFO Joel M. Frank agreed to pay almost $29 million to resolve allegations they concealed an African bribery scheme and subsequent investigations by U.S. regulators that ultimately cost the company about $412 million and caused its stock price to fall, allegedly harming investors.  The investors’ attorneys said their requested award is justified by the risks and complexity of the case, the time and effort they put into it, the quality of their legal work and the expenses they incurred.

Each of the two class representatives is requesting $5,000.  “Class representatives and class counsel undertook the risky task of pursuing this litigation, with no guarantee of the positive outcome they achieved,” the filing said.  The investors' suit claimed Och-Ziff touted its "reputation for integrity," "transparency" and "strong financial, operational and compliance-related controls" even though the company was allegedly engaged in a years-long bribery scheme.  The company and executives bribed foreign officials in exchange for "hundreds of millions" of dollars' worth of business in Africa, violating the Foreign Corrupt Practices Act, an amended complaint said.

The U.S. Securities and Exchange Commission and the U.S. Department of Justice began an investigation in 2011, but Och-Ziff hid the probes from investors until The Wall Street Journal published an article in 2014 about deals in Libya, the investors said.  At that point, the company simply said the investigations involved the FCPA and "related laws," according to the amended complaint.  Two years later, the WSJ published another article that stated the DOJ was pursuing a criminal guilty plea and the SEC wanted to fine Och-Ziff as much as $400 million, sending shares of the company down more than 13 percent, the investors said.

Och-Ziff ultimately admitted to violating the FCPA in 2016 and agreed to pay about $213 million in a deferred prosecution agreement with the DOJ and $199 million in disgorgement to the SEC.  The case is Arthur Menaldi et al. v. Och-Ziff Capital Management Group LLC et al., case number 1:14-cv-03251, in the U.S. District Court for the Southern District of New York

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